NEW DELHI: Tata Motors, Mahindra & Mahindra recorded their highest ever monthly car sales in March as demand for new models and diesel cars continued to accelerate.

According to analysts, auto sector is likely to be an outperformer atleast in the near term, which makes auto stocks a good buy on declines. However, moderation in demand is expected in FY13.

"We expect demand for automobiles to considerably ease in Q1 FY13 across segments as the sector enters into a lean phase. We expect H2 FY13 to be better for auto sector in general as the positive benefits of softening interest and inflation accrues," said Deepak Jain of Sharekhan Institutional Research.

"I believe the auto pack would tend to be an outperformer at least in the near-term but then again beyond 4% to 5% rise, you will start seeing valuation concerns in 2 wheelers pack. One would not be comfortable pumping more money into commercial vehicles because we do not clearly know whether the CV cycle is going to turn in the next 3 to 6 months," said P Phani Sekhar, Fund Manager-PMS, Angel Broking.

Gaurang Shah, Asst VP, Geojit BNP Paribas Financial Services said, we prefer Tata Motors and Mahindra & Mahindra in the auto space. However, on Maruti Suzuki, we are a little bit underweight given the kind of overhang the company is currently dealing with.

"In the 2-wheeler sector, we are positive on the front line 2 wheeler pack such as Bajaj Auto and Hero MotoCorp. If an investor has long-term view, then TVS Motor also suits well. Amongst the other names, Eicher Motor not a very liquid counter but yes from an investment point of view definitely stands tall," added Gaurang Shah.

Tata Motors posted a 34% year-on-year increase in its March sales at 36,984 units while the country's largest utility vehicle maker, Mahindra & Mahindra ( M&M) too reported record monthly sales at 47,001 units, an increase of 25% over March 2011.

"The past year we saw some promising segments emerging which can continue to see robust growth. Prominent amongst them are diesel cars, Light Commercial Vehicles and Utility Vehicles. We see Tata Motors and Maruti Suzuki benefiting from the shift," added Deepak.

'M&M automotive business is also benefiting from the improved demand towards UVs however tractors have disappointed. In FY12; M&M-tractors grew by just 10% and have not met even the original growth guidance of 11-13% issued during the beginning of the year', He further adds.

According to analysts, the demand for next month would be impacted due to the increase in excise duty, registration tax and value-added tax, proposed in the Union budget.

Technical View: Rajat Bose of rajatkbose. com

Rajat Bose of rajatkbose. com said Mahindra & Mahindra seems to be recovering from lower levels. However, if the stock sustains levels above Rs710 then there is a possibility that the next target would be around Rs730 to about Rs750.

"For Maruti Suzuki, I am not expecting the stock to cross Rs1400 and sustain thereabouts because it would attract a lot of selling pressure right from the levels of 1380 to about 1450," added Rajat.

BSE Auto index has been one of the winning sectors from January to March, gaining 24.1 percent, well above the 14.5 percent gain in the broader Nifty index.